Low Interest Rates Help Companies at the Expense of Savers - NYTimes.com

I would have posted this article from the New York Times earlier today but I was at a client meeting. Turns out I should have brought the article with me.

At my meeting, the topic of discussion was exactly along the lines of this article: namely, how can the client earn a higher rate of interest without taking too much principal risk.

Unfortunately, there are no simple answers. Corporate bond yields have declined dramatically along Treasury rates, and corporate borrowers are enjoying some of their lowest borrowing rates in decades. However, the article notes that corporations are simply holding onto the funds they raise in the bond market:

As demand for such bonds has soared, it has prompted corporations like PepsiCo and Wal-Mart to issue more bonds at bargain-basement rates of interest. Such companies sold $563.4 billion to United States investors last year, a record, and have sold $238.8 billion more so far in 2010, according to Dealogic, a financial data provider. Yet, economists complain that apart from a few notable corporate acquisitions that were financed largely with pent-up cash, many businesses are sitting on their money rather than spending it. For now, that would seem to undermine the purpose of low interest rates, which is to get companies and consumers spending again.

Nonfinancial corporations were holding about $1.8 trillion in liquid assets in the first quarter of this year, according to the Federal Reserve, a level that has been steadily rising and compares with $1.5 trillion at the start of 2009.

Besides a sense of caution, I also believe that corporations are holding off on their capital spending plans in anticipate of more favorable tax treatment in 2011, as President Obama recently proposed.

Of course, there is another part of the capital markets that offer good yields, but most are not interested: namely, dividend-paying stocks. As a previous post noted, the relative yield advantage of stocks versus bonds is also at a multi-year high, but investors are still fleeing the U.S. stock market in favor of other areas.

Finally, I should note that this article had already received more than 270 comments on the New York Times website as of 2 pm today. Regardless of the merits of the current Fed policy, low interest rates are essentially pitting savers versus borrowers, and no one seems too happy.

Low Interest Rates Help Companies at the Expense of Savers - NYTimes.com